UCP 700
Between us, we have been involved in numerous ICC Working Groups drafting, revising and publishing ICC Rules and Standards for the past 25 years.
A topic that we have seen emerging over the last 18 months revolves around the possibility or requirement for a revision of UCP 600.
The International Chamber of Commerce (ICC) introduced the Uniform Customs and Practice (UCP) for Documentary Credits in 1933 with UCP 82, in order to alleviate the disparity between national rules on letter of credit practice. Further revisions occurred in 1951 (Publication No. 151), 1962 (Publication No. 222), 1974 (Publication No. 290), 1983 (Publication No. 400), 1993 (Publication No. 500) and, more recently, 2007 (Publication No. 600).
It should be noted that UCP 82 was not the first set of published rules to govern documentary credits. Regulations affecting export commercial credits were issued in the US in 1920 and were subsequently amended in 1926. In 1928, a group of banks in Denmark also produced joint regulations governing the handling of documentary credits.
Key external movements in international trade practice have often triggered past revisions of UCP. The question is whether or not we are facing new issues that are transforming the way we handle documentary credits. For instance, it could possibly be argued that regulatory change is a catalyst for a new revision.
Practical considerations
Whilst history shows that there has been a revision on average every 10-14 years, this is not a hard and fast rule. At the outset of any revision it needs to be demonstrated that the existing UCP is no longer supporting the trade finance community and is proving to be a hindrance rather than the simple passing of approx. 10 years or so.
If a rule is wrong or there is a gap, this supports a revision. However, if a practice is wrong or is misinterpreted, this is an issue for a revision of ISBP (International Standard Banking Practice for the Examination of Documents under UCP 600).
A strong business case is needed for any revision due to the need for not only a 3-year commitment, but also a regular meeting schedule between Working Group participants. An effective Working Group will require 6-8 participants available for frequent meetings, travel, phone conferences and independent work outside the meetings and calls - this is a big investment in time for any individual or organisation.
Physical meetings are required every 2-3 months necessitating availability of a venue and surrounding infrastructure for a period of usually one week. In addition the Working Group will meet at every Banking Commission meeting for at least 2-3 days before the meeting and 2-3 days after.
The work does not end with a Working Group: in addition, there is a requirement for a Consulting Group consisting of up to 20 members, with a similar infrastructure and time investment required. And to round it all off, ICC National Committees will be expected to provide a strong contribution for the entirety of the revision project.
The cost does not end with the revision itself. Once a new version of UCP is approved, it generates an immediate need for education and learning within organisations utilising documentary credits and will necessitate internal systems and operations changes. The combined cost of purchasing new publications, running staff workshops, hosting client awareness events and updating internal procedures can be very high.
As a starting point, and prior to any proposed revision, it would be worth considering a review of existing delivery and distribution channels for trade information originating from the ICC Banking Commission. Many of the problems that we have seen could be resolved by enhanced knowledge of ICC Opinions and publications.
One issue is the availability of ICC Opinions: for whatever reason, there appears to be a bottleneck in many countries and, within those countries, in a number of banks. The paperwork often reaches the required destination but remains on or in the desk of one individual. This is not optimal and could be overcome by making ICC Opinions available online at an affordable price - affordable being the key word, as pricing must be set at a level that makes sense in emerging markets. Such pricing approach should also be considered for ISBP 745, which is a key guide for practitioners. Adopting these recommendations would ensure clarification of many educational issues.
Are there valid reasons to start a revision process?
No set of ‘living' rules can be perfect. Customs and practices develop, therefore it is always hoped that past drafters have been prescient (or fortunate) enough to ensure applicability of rules even through periods of change.
Has change been compelling enough to force the letter of credit community to consider initiating a request to the ICC Banking Commission for a UCP revision?
Before moving to that step, it's worth analysing ICC published Opinions from 2012 to 2015 in order to understand where the real problems have been faced in recent times.
Function of document: 24%
Signing of document: 13%
Other transport document issues: 13%
Description of goods: 12%
Incomplete presentation: 6%
Presentation & expiry: 6%
Guarantee issues: 4%
Collection payment: 4%
Amendment: 3%
Mailing of documents: 3%
Charges: 3%
Other issues: 9%
50% of the problems apply to the presented documents: it is a justifiable assumption that a greater understanding of ISBP 745 would help alleviate these problems and greatly reduce this percentage. As regards the remaining 50%, it is difficult to see how a revision of UCP would make much material difference.
In any event, we have listed below a number of the issues that have been brought to our attention as rationale for a new version of UCP 600.
Remove reference to drafts: Market feedback from a number of respected trade practitioners is questioning the on-going requirement for drafts in a documentary credit transaction. We have some sympathy for this viewpoint, as a draft under a letter of credit is, ultimately, a redundant instrument. Removing drafts (and negotiation) from UCP would leave the definition of ‘honour' as simply at sight or deferred payment. The problem likely to be faced in this regard is that drafts combined with documentary credits still have enormous support from certain parts of the world. It should also not be forgotten that whether or not drafts are required is not a UCP issue. It is the case that almost every bank's application form, whether in paper form or on-line, will contain a pre-set requirement for the presentation of a draft. Whether a draft is required or not is within the hands of every issuing bank and does not need a change to the UCP to achieve it.
Freely available credits: The problem with a freely available credit is that a bank does not need to be specifically nominated in order to honour or negotiate and present documents to the issuing bank. In such circumstances, it may well be that the nominated bank does not have a relationship with the issuing bank and no KYC / CDD measures would have been completed. This can certainly be a regulatory problem.
Remove negotiation as a form of availability: This issue has been seen in a few suggestions. Such a change would have serious implications for the letter of credit business. The ICC Global Trade Survey 2015 indicated that 72.3% of MT700's issued in 2014 were available by negotiation (sight or tenor). In 2013, this figure was 70.8%.
Removal of negotiation from the UCP would not stop letters of credit being issued available by negotiation. What it would do is create uncertainty as to its application as banks will create different interpretations that suit their needs at a specific time.
Sanctions: Should a sanctions article be added, or perhaps be included as a sub-article of article 36 ‘Force Majeure'? The current wording does not cover sanctions although, regardless of this, the applicable law will always override the UCP. Having said that, there is an argument that article 36 could be extended in line with URDG 757 article 26, which explains the situation should payment be prevented by a force majeure event.
Exchange control regulations: These are a matter of national law and are outside the rules. Regulations and controls are not standardised globally nor do they remain static. As such, it would not be sensible for inclusion within ICC rules. UCP 600 sub-article 37 (d) provides for the applicant to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages. Out of interest, the first version of UCP, publication no. 82, included a disclaimer that banks assume no liability or responsibility for consequences arising out of the interruption of their business by a decision of a public authority. This remained for publication 151 but was dropped for publication 222 and ever since.
Transport: UCP should provide a correct reflection of market conditions, including transport and logistics. Each revision of UCP has responded to a shift in market practice. Logistics has certainly had an impact in this respect; part of the rationale for the UCP 400 revision was containerisation and the need to define transhipment for such a change. It is, however, questionable as to whether or not there has been sufficient change in this sector to justify a UCP revision. However, the following issue could be a matter for consideration.
Charter Party Bill of Lading: If a credit simply allows for or requires the presentation of a charter party bill of lading (CPBL), a CPBL issued and signed by a carrier or its agent is discrepant under UCP 600 sub-article 22 (a) (i). Some have argued that this is no longer in accordance with evolving practice.
Green / sustainability issues: Initiatives, which are on-going in this field, have been using UCP 600 as a base and no areas of conflict have yet been identified.
Removal of Standby letters of credit: UCP 600 is not particularly user-friendly when it comes to this instrument. The aim with this proposal is that ISP98, which is dedicated to standby credits, be the only set of applicable rules. Whilst there are conflicting arguments as to the way forward, as a stand-alone it is not a compelling reason for a UCP revision. Also, the removal of the phrase "(including, to the extent to which they may be applicable, any standby letter of credit)" from article 1 would not necessarily stop any bank from issuing a standby letter of credit subject to a future revision of UCP.
Inoperative credits: Clarification as to how and when the credit becomes operative. This is partially addressed in UCP 600 article 11 but may need expansion.
The above list is by no means exhaustive and merely highlights a few of the issues that have been raised. Our perspective is that the majority of problems faced under documentary credits are caused by one or more of the following: a) poor drafting of the credit; b) lack of understanding of documentary credit workflows and the principles of UCP 600; c) lack of attention to detail and management of the production, shipment and document collation processes; and d) excessive and unnecessary data being added to documents. Each of these problems is surmountable with more training and education (particularly with respect to ISBP 745), not with a UCP revision.
Simple tasks can reduce discrepancy rates:
Next steps
So, are the above reasons strong enough to demand a revision?
Ultimately, this will be a decision for ICC National Committees and the Banking Commission Executive Committee. Each individual reason does not provide enough rationale as a stand-alone but holistically the argument may be stronger. We are not convinced that the argument is yet strong enough to warrant the work and cost that will ensue. If there is anything close enough to a justification, it may come from the regulatory side but these are issues that have always been considered to override the rules.
However, we would be most interested in your views - this is an issue that will not go away and it would therefore be very worthwhile if we could obtain a market consensus that can then be fed back to the ICC Banking Commission for discussion / consideration. Contact us at dave@tradefinance.training and gary@tradefinance.training